How your family trust will be treated for New Zealand tax purposes

Trusts are not treated as separate entities for income tax purposes. Consequently, there are no rules in the Income Tax Act governing the residence of trusts.

The New Zealand tax obligations of your family trust will depend on how your trust is classified under New Zealand law.

The New Zealand trust regime is a "settlor" based regime. This means that the New Zealand tax treatment of the trust depends on where the settlor of the trust is resident.

The New Zealand trust regime defines three types of trusts:

A complying trust is an ordinary New Zealand resident trust with New Zealand resident trustees and a New Zealand resident settlor.

A foreign trust is a trust where the settlor is a non-resident at the time a distribution is made. The distribution you receive from a foreign trust is not taxable if it is:

a distribution of realised capital gains, or

the payment out of the corpus of the trust.

A non-complying trust will occur when a trust was a foreign trust but the settlor has become a New Zealand tax resident.

As a trust does not have a legal personality, there is no concept of residency for trusts. However,the trustee of a trust may be recognised as a New Zealand taxpayer and therefore New Zealand generally verifies the residency of the trustee. A trustee includes all co-trustees of that trust for the time being, and New Zealand residence is determined by whether a sole trustee or at least one co-trustee is resident in New Zealand.

The residence of the trustee is generally not relevant in determining the treatment of trustee income: New Zealand-sourced trustee income is always subject to tax, and foreign-sourced trustee income is subject to tax on the basis of the residence of the settlor.

Changes in residence

If you are a non-resident settlor of a trust - it will be treated as a "foreign trust" for New Zealand tax purposes until you become a New Zealand tax resident. This will be from the date:

you cease being a transitional resident, or

if you have not been a transitional resident, your first day of residence in New Zealand.

Once you become a New Zealand resident, your family trust will be treated as a "non-complying trust". You can make an election within 12 months for your family trust to become a complying trust.

Your obligations relating to your trust

Having determined the status of your family trust in New Zealand, the trust will have the following tax obligations:

If your family trust is a complying trust, the trust must file income tax returns and is required to pay tax on its worldwide income (i.e. all income whether it is derived in New Zealand or offshore) less any distributions of beneficiary income.

If your family trust is a foreign trust or a non-complying trust with New Zealand resident trustees, the trust is only taxable on New Zealand source income. A foreign trust will be required to make an additional disclosure.

If you are a settlor of your family trust which is a non-complying trust with non-New Zealand resident trustees, you as settlor are liable to pay income tax on the trust's world wide income as an agent for the trust.

What to do if you receive beneficiary income from a trust

Your tax obligation depends on the type of trust from which you receive the distribution.

A complying trust

You are taxable on beneficiary income received from a complying trust and you must return the income in your tax return. You are not liable for income tax if the distribution is accumulated income of the trust.

A foreign trust

The distribution you receive from a foreign trust is not taxable if it is:

a distribution of realised capital gains, or

the payment out of the corpus of the trust.

The exemption for capital gains does not apply to the gains the foreign trust derives from transactions between associated persons. All other distributions are taxable.

A non-complying trust

Distributions from a non-complying trust to a beneficiary are subject to full New Zealand tax at a rate of 45% (except for corpus). A New Zealand resident settlor might also be liable for the income tax of the trust as an agent of the trustees.